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Clause 168

Banking Bill – in a Public Bill Committee at 11:00 am on 28th October 2008.

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Interpretation: “inter-bank payment system”

Photo of David Gauke David Gauke Shadow Minister (Treasury)

I have two questions for the Minister. This is an interpretation clause and should not detain us for long. The clause relates to an inter-bank system. Subsection (1) refers to

“arrangements designed to facilitate or control the transfer of money between financial institutions who participate in the arrangements.”

I should be grateful if the Minister said a little more about money. We know that money includes credit, but the Bank of England publication, “Oversight of Payment Systems” from November 2000, states that

“‘money’ is regarded as cash (ie notes and coins issued by the central bank or government) and claims against credit institutions in the form of deposits.”

It continues:

“In the end, however, what is acceptable as ‘money’ is a matter of behaviour and the boundary could move.”

Does the Minister agree that money is a more flexible concept than it might first appear?

My second point is about subsection (5):

“A system is an inter-bank payment system for the purposes of this Part whether or not it operates wholly or partly in relation to persons or places outside the United Kingdom.”

That comes back to the territorial point that has been mentioned already. In order to fall within the regime, is it necessary for the operation of the payment system to be in the UK? Does it matter where the participants are? Is that the test? If so, this is a broad territorial test, and it could appear to cover any payment system anywhere in the world. I assume that the key point is the operation—where is that performed? If it is performed from the UK, will it be caught by the system so that it does not matter where participants are based?

Photo of Peter Bone Peter Bone Conservative, Wellingborough

On my hon. Friend’s last point, if I send money to America and there is a transfer between a British bank and its subsidiary in the US, is that part of the system? If the payment originates in the US and money is sent to me, will the regulations cover the bank over there? That is an important point.

Photo of Brooks Newmark Brooks Newmark Opposition Whip (Commons)

I, too, shall be brief. I am sorry to see that the hon. Member for Wolverhampton, South-West (Rob Marris) is not on the Committee. I know how assiduous he is with explanatory notes. Having learned my lessons from him, I will ask a couple of questions relating to points made in the explanatory notes. The first is about subsection (2), which states that if non-financial institutions participate, that will not prevent the process from being considered an inter-bank payment system. I am curious about what institutions the Minister has in mind when he talks about non-financial institutions. Why has that been raised, what red flags have given him concern about non-financial institutions and why are they being brought under the umbrella? I suspect I know why, but I am curious to hear his take on the matter.

My second question relates to subsection (5), but it approaches from a different angle to that taken by my hon. Friend the Member for South-West Hertfordshire. It relates to the issue of systems operating wholly or mainly outside the UK that are to be included and how we will deal with different regulatory environments. A provision might be interpreted as being right in the UK because it has an impact on what goes on in the UK, but how do we try to enforce policies with institutions under different regulatory regimes in other countries?

Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary, Department for Business, Enterprise & Regulatory Reform, Economic Secretary, HM Treasury 11:15 am, 28th October 2008

I am happy to try to provide clarification for the hon. Gentleman. As the hon. Member for South-West Hertfordshire said, the clause defines the use of the term “inter-bank payment system” throughout part 5. He referred specifically to subsection (1), which defines the term “inter-bank payment system” for the purposes of the Bill and refers to the arrangements that enable the transfer of money. Subsection (4) confirms that that includes credit between participating financial institutions, which are defined in subsection (3) as banks and building  societies. Let me be clear that the Bill will give us the flexibility to recognise new systems in the future, and we think it appropriate that we should be able to do so. Let me also be clear that that does not include internal bank systems or correspondent banking arrangements.

The hon. Gentleman also raised the issue of subsection (5), which will ensure that systems operating wholly or mainly in relation to persons or places outside the UK can be classed as inter-bank payment systems for the purposes of part 5. I shall give a little more detail on that because a few hon. Members questioned how the legislation would work. Recognised inter-bank payment systems that are wholly or partly based outside the UK might be systemically important for the UK financial system. Where that is the case, part 5 provides for the Treasury to recognise them and for the Bank of England to oversee them to the extent that that is possible. In most circumstances, that oversight would be delivered through the Bank of England’s participation in international co-operative agreements with other central banks, because that is the nature of things.

Clearly, we cannot regulate for the American banking system, as the hon. Member for Wellingborough hinted, but we can ensure that the Bank of England can participate in those international co-operative agreements and make the points that it needs to in order to discharge its responsibilities.

Photo of David Gauke David Gauke Shadow Minister (Treasury)

I am grateful to the Minister, because what he has just said is helpful. For further clarity, is he saying that the Treasury will not seek a recognition order in respect of a payment system that is regulated by another central bank? Is he saying that it will not go that far, but that the Bank of England will undertake a role in oversight? I am not quite clear about that. I note his point about not wanting to regulate things that are regulated by another central bank, but is he saying that there will not be a recognition order for such a payment system?

Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary, Department for Business, Enterprise & Regulatory Reform, Economic Secretary, HM Treasury

I am clearly saying the latter. We think that in most circumstances it will be appropriate that oversight is delivered through the Bank of England’s participation in international co-operative arrangements. It is not right to say that that will be the case in each and every circumstance, because I cannot anticipate what future circumstances might be. However, the normal way of things is that we would discuss such matters with other central banks as part of the normal arrangements. I hope that answer provides clarity to the Committee.

Question put and agreed to.

Clause 168 ordered to stand part of the Bill.